SFE SUBMISSION TO SCOTTISH PARLIAMENT INQUIRY
September 11, 2009
SCOTTISH PARLIAMENT INQUIRY - ‘THE WAY FORWARD FOR SCOTLAND'S BANKING, BUILDING SOCIETY AND FINANCIAL SERVICES SECTOR'
Submission by Scottish Financial Enterprise
1. What is your view on the cause, nature and impact of the recent difficulties in the financial sector in Scotland?
The cause was the worldwide financial crisis caused by the under pricing of risk and the collapse in financial markets that followed, leading in turn to a seizing up of capital markets and a huge loss of liquidity. The impact in Scotland, as in all other financial centres around the world, has been severe.
2. What evidence do you have on the issue of the availability and the cost of credit and what effect have the initiatives undertaken by the banks, government bodies, regulators and others had?
The cost of credit had initially risen as the under pricing of risk mentioned above is remedied and as the availability of capital for banks to lend remains constrained. But base rates have also come down so this has applied pressure in the other direction. Action by the UK government and the Bank of England has helped to maintain credit flows at higher levels than would have prevailed without their intervention.
3. What changes can be expected as part of the ongoing and future restructuring plans in the financial services sector within Scotland?
The financial services industry in Scotland is very diverse. We have very successful companies - many of them household names - providing services in insurance, pensions, fund and investment management, asset servicing, investment banking and corporate finance and broking. So change will occur across a very wide range of operations and markets and it is very hard to generalise.
But some changes are inevitable and driven by competition in markets; others can be influenced by governments and regulators. The former will come about as some companies restructure to meet the demands of the new marketplace or to take advantage of new opportunities they can see emerging. The latter, which will shape the regulatory and legal environment in which Scottish financial services compete, will be taken by the UK authorities and supranational groupings like the EU and the G20. SFE believes that the far-sighted approach is to keep a rigorous check on measures that might undermine our companies' ability to compete internationally and to ensure that as far as possible any changes are co-ordinated internationally, to reduce the risk that regulatory systems are compromised by regulatory arbitrage (that is, playing one system of regulation off against another).
4. How might these changes affect the business and retail banking market in Scotland, access to project finance, a reduction in competition on the ‘high street' for lending, the plans for the retention of functions and ‘headquartering' etc and what can the public sector in Scotland do to ensure the best possible result for Scotland?
Banking in Scotland is a competitive business. All of the UK banks have a significant presence here and competition for business and retail customers is fierce. While decisions on the location of functions are for individual companies, the best thing the public sector can do is to make the impact of any policy change on Scotland's international and intra-UK competitiveness a decisive factor in their decision making.
5. What are the current employment levels and skills base in the financial sector in Scotland and how may these change? Additionally, what are the types of jobs that might be expected to be lost as part of any restructuring plans?
Estimates of current employment levels vary (see below). But the skills base is regularly cited by inward investors in financial services as a key attraction for them, and one that reflects the excellence not only of our schools, colleges and universities but also of our professional bodies. Scotland has the oldest professional bodies in the world in banking and accountancy and our actuarial profession is one of the oldest in the world (unsurprisingly, perhaps, since the Scottish Widows and Orphans Fund, created in 1748 and now Scottish Widows , was the first life assurance scheme).
Anecdotal evidence and common sense suggest that compliance and risk management will grow in importance, and possibly size, in many companies.
6. How are employment levels in the financial sector calculated at present, under what definitions and how do these relate to ONS figures? What changes are required to make employment figures more meaningful and comparable with other financial centres?
The Committee's decision to focus on this question is welcome. SFE is aware of a range of estimates of the total numbers employed in financial services. ONS has revised its figures in recent years, from 106,000, to 86,000, in successive years. This reflects changing definitions and ways of counting. Some self describing surveys (where the respondent decides whether or not they work in financial services) put it at 145,000.
The Committee has rightly identified a question relating to comparisons with other financial centres. Different definitions and measures are used in different places, so a common language to facilitate comparisons is absent.
SFE is working with the Fraser of Allander Institute to update its work of 2000, which gives figures for total employment as well as contribution to GDP. This work is in progress.
7. What are your views on the current efforts across the public sector in Scotland to respond to the recent difficulties in the financial sector in Scotland and what, if anything, needs to change in the future as the situation develops?
The public sector agencies have responded well, in very difficult circumstances. The value of the private and public sector partnership, the Financial Services Advisory Board (FiSAB) and the well established dialogue between the industry and the devolved government should not be underestimated. This has facilitated good sharing of information and an emphasis on measured, careful communications in an often febrile environment. This approach has included local authorities, particularly those of Edinburgh and Glasgow, who have the greatest concentrations of jobs in the industry.
It is in the nature of the financial crisis that many of the policy levers rest with the UK Government rather than the Scottish. The Treasury and other UK authorities, including the Bank of England, the FSA and the Treasury Select Committee at the House of Commons, have taken steps to include Scotland in their consultations and discussion with the industry.
For the future, as the UK economy continues to adjust to the long-term changes brought about by the financial crisis, it will be important for public agencies to join up across the devolved/reserved boundary, so that Scotland can take full advantage of UK - level policy initiatives.
8. Has Scotland's reputation as a global financial services centre been detrimentally affected by the global crisis and has this been to any greater extent than the problems felt in other financial centres?
We need to guard against any assumption that others see us in the way we see ourselves. If one read, watched and listened to only Scottish-based media in recent months, one might indeed conclude that Scottish financial institutions were being hit uniquely hard. That is understandable, because the Scottish media rightly makes Scottish issues, and the fortunes of Scottish companies, a priority. But the same happens overseas, so what is big news for Scotland is not big news everywhere. In Geneva, the problems at UBS attracted most attention; in Brussels, it was Fortis; in Ireland, it was the Irish banks. The crisis in banking has been worldwide in its impacts.
There is work to be done to rebuild the reputation of financial services and banking but that is an international task, not one confined to particular places or centres. But that doesn't mean we should be complacent.
9. How should Scotland differentiate itself and promote itself as a financial services centre in the future and what steps are being taken by our competitors in this respect?
While Scotland's financial services are diverse, covering virtually all aspects of the industry, the whole is greater than the sum of its parts. Scotland stands as an international financial centre in its own right and that gives us a head start.
We need to take the initiative and, to do that, continued co-ordination between Scottish and UK agencies and actors is essential. Scotland's position as part of the UK and part of the City of London brand is very important internationally. More than half of financial services jobs in the UK are outside London and the distinctive nature and heritage of Scotland as a financial centre enhances and broadens the UK's promotional pitch for international business. The challenge now is to respond quickly to the changed business environment. Scotland must move rapidly to assess the impact of changes in the regulatory environment at EU and national levels and consider how Scotland's strengths - in investment management, insurance, asset servicing, banking and professional services - can be promoted in this new framework.
10. How can we ensure that the Scottish financial sector continues to retain a global perspective and does not retreat into a purely localised lending regime?
By maintaining the openness of our markets and our working practices.
11. Why are "new" banks choosing to establish themselves in Scotland, what is it that is particularly attractive and how can we build on this and attract additional investment into Scotland?
The skills of Scotland's workforce in financial services are internationally very competitive and the education system, coupled with an openness to new talent from overseas, maintains that. Costs are lower than in some other parts of the UK and Scotland is an excellent place from which to serve customers throughout the UK.
Further investments can be attracted if we avoid any increases in costs for business relative to the rest of the UK. We suggest that all policy proposals at the hand of the Scottish Government should be subject to an ‘International Competitiveness Assessment', similar to Environmental Impact Assessments. If a policy seems likely to harm our international competitiveness, consideration of that should weigh very heavily in any decision whether to proceed.
And infrastructure is vital. For example, the success of our airportst in increasing business flights, including the vital regular links to City Airport, has had a major impact and should continue to be supported. But the biggest infrastructure issue for the immediate future will be high speed rail. We cannot afford to put Scotland at a disadvantage to competitor areas south of the border by allowing HSR links to stop short of Scotland.
Scottish Financial Enterprise
September 2009
